‘Global risks persist, not time for aggressive fiscal consolidation’

NEW DELHI: The government should not go in for an ‘aggressive fiscal consolidation’ in the upcoming budget as global risks have not abated, RBI Monetary Policy Committee (MPC) Member Ashima Goyal said on Wednesday.

Goyal further said subsidies are expected to come down as food and energy inflation moderates. WPI inflation in food articles in November was 1.07 per cent against 8.33 per cent in the previous month. In the ‘fuel and power’ basket, inflation was 17.35 per cent last month.

“Given fears of a global slowdown, this is not the time for aggressive consolidation. Sticking to small pre-announced steps on the path will minimise growth sacrifice, while moderating demand and the current account deficit, thus lowering the risk premium that keeps spreads high and raises the cost of government and private borrowing,” she said.

India’s fiscal deficit, the gap between expenditure and revenue, is projected to come down to 6.4 per cent in current fiscal ending March 2023, from 6.71 per cent in 2021-22.

The government has set a consolidation target under which it aims to reach a fiscal deficit level below 4.5 per cent by FY26. Fiscal consolidation refers to ways and means of narrowing the fiscal deficit. Goyal was asked whether the finance minister should go for fiscal consolidation or fiscal expansion in her upcoming budget.

Finance Minister Nirmala Sitharaman will present the Union 2023-24 Budget in Parliament on February 1.

The eminent economist said expenditure must be counter-cyclical and the mistake made in the 2000s, when expenditure rose with tax revenues, should be avoided.

“Well-integrated components of the current macroeconomic policy strategy have delivered and should continue given global risks have not abated,” she opined.

As per Goyal, the strategy includes prioritising investment while giving essential support for the vulnerable.

“Better composition of government expenditure and other supply-side action has enabled excellent monetary-fiscal coordination that has strengthened Indian macros,” she said. While noting that debt ratios came down sharply last year under higher growth, she said institutions and incentives have to be strengthened to help sustainably implement the strategy including in states.

On why the RBI failed to contain inflation for 10 consecutive months, Goyal pointed out that these 10 months have coincided with the Ukraine war that raised international energy and food prices to which India is particularly sensitive and this followed the pandemic, which had also raised global commodity prices as supply-chains snarled.

“A flexible inflation target policy has to look through temporary supply-shocks but as soon as it became clear that supply-side inflation was going to persistently exceed the tolerance band, repo rates were raised within 6 months to make ex-ante real interest rates positive,” she said.